It's time to pay back those high-balance med school loans, but there's one problem: You're living on a resident's salary.
Unfortunately, no, you generally can't defer federal student loan payments during your residency. So what are your options? There are three paths to consider:
- Forbearance, which will relieve of your payments in the short-term, but will inflate the overall size of your loan due to accrued interest.
- Changing your payment plan, which can provide temporary relief, but may also result in added interest tacked onto your loan balance.
- Refinancing, which could yield a lower interest rate and more manageable payments, although you'll have to forego some benefits, such as the potential for loan forgiveness or income-driven payment options.
Let's dig into the details of each option.
Both deferment and forbearance are options that allow you, for a specific period of time, to temporarily delay making payments on your student loans. Of the two, only forbearance is an option to take a break from payments during your residency.
The big drawback to forbearance is that interest continues to accrue on your loan even though you're not required to make monthly payments. That means, when it's time to start paying again, you'll have a bigger loan balance to tackle, along with larger monthly payments.
For this reason, forbearance should be an option of last resort.
If you decide to apply for forbearance, you must be approved by your student loan servicer. Generally, forbearance is approved in 12-month increments, so you'll need to re-apply every year.
Generally, you are eligible for both deferment and forbearance if you are experiencing unemployment, financial hardship, or are serving in the military. However, medical residents may apply for a mandatory forbearance.
Change your payment plan
Federal student loans come with several options for payment, including several income-driven plans that cap your payment at 10-15% of your discretionary income.
Even better: You can change your payment plan at any time. Just call your student loan servicer to find out what your options are.
The only drawback is that some income-driven options come with payments that are so low they don't cover the monthly interest on your loan. Any unpaid interest then capitalizes, meaning that it's added to your overall loan balance. So even though you're making monthly payments, you won't be making any progress on your loan payoff — and, in fact, your balance could continue to grow.
If you decide to opt for an income-driven plan, make sure that you're making payments that are large enough to cover your monthly interest, plus a little extra if you can.
Refinancing your loans with a private lender can yield you a lower interest rate, along with manageable monthly payments. Best of all, this is an option that can help ensure you're making progress on paying off your loan instead of just holding it at bay.
The only drawback? Refinancing with a private lender means you'll lose access to the perks that come along with federal loans, such as forbearance and income-driven payment. You'll also lose eligbility for student loan forgiveness, if that was something you planned on pursuing.
However, the financial benefits may far outweigh any benefits that you give up.
To find out more, check out our post on three refinancing options for medical residents.